Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Chief Investment Strategist
Summary: The gaming industry has for years been a strong and high growth industry driven by the adoption of mobile gaming significantly increasing engagement. CD Projekt is one of the older gaming developers in Europe and has predominantly stayed with games on desktop and consoles, and been through tough 18 months with revenue declining rapidly. The company has recently stabilised its business and presented yesterday its new long-term vision for the company which investors seem to be buying into. We take a look at the company and also the overall gaming industry.
CD Projekt sets sail for a new long-term strategy
CD Projekt is one of the leading European gaming developers and has risen 46% since early September despite first-half year result disappointed against estimates but delivered net income growth of 8% y/y. The gaming developer said it would deliver a long-term strategy vision for the company and this new vision came yesterday. It includes working on two AAA gaming projects which are Witcher and a new title. In addition, the deputy CEO is stepping down and joining the supervisory board instead and a new share buyback programme of PLN 100mn has been initiated. The company also says that it will add multiplayer elements to its video gaming pipeline, which has a lot of potential due to higher engagement in multiplayer, and the gaming developer has said that it will not sell new shares to finance the new gaming projects.
The market has been betting on good news from CD Projekt and with the stock price up 5% today extending on yesterday’s move it seems investors are buying into the long-term strategy. The past 18 months have been tough for the company as revenue has declined from PLN 2.1bn in 2020 to just PLN 796mn in the past 12 months. The equity valuation, measured on 12-month forward EV/EBITDA, is still 150% above the MSCI World Index suggesting high expectations for growth in the future.
The gaming industry was one of the biggest winners during the pandemic as people sought online entertainment during their lockdowns which was reflected in the 2020 performance of our gaming theme basket (see 5-year chart below). But since the reopening engagement has fallen and gaming developers such as Sony and Microsoft have experienced declining revenue. The median 12-month revenue growth in our gaming basket has fallen to 5.4% and margins have down but still are strong at around 22.2% for the industry. Analysts have maintained their high price targets with the average stock being 41% below the price targets.
As PwC’s Global Entertainment & Media Outlook suggests gaming revenue will continue to grow healthy over the next 4-5 years. We remain bullish on the industry longer term as the gaming industry has a more compelling business model than video streaming which is the biggest competitor on the consumer’s time for leisure. Short-term risks for the industry are the high electricity making gaming more expensive, cost-of-living crisis lower available income for gaming, and higher interest rates compressing valuations even more.
5-year price chart on Saxo’s gaming theme basket and MSCI World
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)